﻿ Ken Szulczyk's Lecture Notes for Environmental and Natural Resource Economics HcWjnyVHiTd8hN_8STvJ2rWaXvhPz4wXYCNGvD4qDkU
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# Lecture #2 - Growing Population and Economic Growth

## The Economic System

Starting with Physics

• First Law of Thermodynamics - "The change in the internal energy of a closed thermodynamic system is equal to the sum of the amount of heat energy supplied to or removed from the system and the work done on or by the system."
• Energy is neither created or destroyed
• Second Law of Thermodynamics - "The total entropy of any isolated thermodynamic system always increases over time, approaching a maximum value."
• To do work, there has to be an energy difference.
• Entropy means energy differences equalize over time.
• Example - you place a hot cup of coffee on your desk.  The room's temperature and coffee's temperature equalizes.  The room is slightly, slightly warmer while the coffee is colder
• The energy is still there from the first law
• Economic activity like production, consumption, transportation, etc. all use energy and resources from the environment.
• Everything comes from the environment
• Examine the graph:

• Humans extract resources and energy from the environment
• Humans use resources and energy to produce goods and services
• Then humans consume these products
• Each human activity generates wastes and energy that is returned to the environment
• Human activities could do the following:
• Resource depletion - humans extract more resources than can be replenished
• Example
• Humans extract water and supply it to cities
• Many cities are extracting more water than the amount being replenished by rainfall
• Pollution - human activities that degrade the environment or resource base
• Example
• Humans emit sulfur dioxide from burning of coal.
• The Sulfur dioxide turns into acid rain, which damages forests and lakes.
• Acid rain depletes minerals from the soil and raises the ph of water, killing the fish
• Environment does have a sink capacity
• Sink capacity - the environment can handle a level of pollution or waste with minimal impact.
• Once the pollution or waste exceeds the sink capacity, then it damages the environment.

• What factors drives this model?
1. Population growth - more people consume goods and services
• Demands for resources and energy increases
• More wastes and waste energy is produced
2. Economic growth - society produces more goods and services
• Each person consumes more goods and services
• More wastes and waste energy is produced
• Be careful
• Technology and institutional arrangement impact the amount of resources, energy, and waste that humans produce
• Last 10 years, people in the United States recycle more
• Glass bottles, aluminum, paper, plastics, etc are recycled
• New institutions and arrangements had to be developed
• Bins and collection centers where people can dispose of their wastes
• Recycling centers that separates the types of waste
• Industries adjusting their production processes to include recycled materials
• New transportation vehicles for recycled wastes
• Traditionally, metals have always been recycled like copper
• Nobody throws away silver and gold
• Market prices exist for recycled materials
• Be careful!
• Recycled materials do not mean it is cheaper
• Costs money for recycling centers, sorting, machines, equipment, and transportation
• Some claim recycling makes products and services more expensive
• You have to compare the cost of recycling the material to extracting the material from the environment.
• High-income countries like United States and Europe are big recyclers
• More is said later in the Environmental Kuznet's Curve

## Population Growth

• More people put more pressure on the environment
• Primary energy consumption increased globally by 4.3% in 2004
• As much as 60% of the global population depends on the waters of international fresh water systems
• Rivers and lakes of which basins are shared by more than two countries
• Predicting fresh water shortages
• Could have more wars and conflicts over fresh water

Graph below shows how fast the world's population is growing

• The developed world is 75% urban
• The rate is accelerating in the developing world
• By 2030 urban population is expected to rise to five billion or 60% of the world’s population
• Sources - U.N. Population Division report World Urbanization Prospects: 2003 Revision; BP Statistical Review of World Energy June • 2005; GEO Year Book 2006; WRI 2005
• The prediction has a problem
• Population growth rate has been slowing and is shown below

• Why is population slowing?
• Children are expensive in both money and time
• Developed countries have close to a zero population growth rate
• People delay having children
• Complete an education
• Accumulate assets like a house, car, etc.
• Much of the population growth is in developing countries
• HIV is impacting population growth rates in some African countries

• Now we see why Mathusian ideas keep coming back
• Population growth is taken as, Pt = Poert
• P is population, r is growth rate, and t is time
• Net growth is birth rate – death rate
• Paul R. Ehrlich wrote The Population Bomb in 1968
• A best seller
• Disastrous predictions for resources and environmental degradation
• Running out of petroleum
• Killing off all the fish (over harvesting)
• Many species are going extinct
• Biologist use a logistic growth function for species
• It is an upside down "U-Shape"
• Example - yeasts
• Add yeasts to a juice, wort (i.e. before beer is beer), or sugar solution
• The yeasts rapidly multiply, consuming the sugar
• Ethanol and carbon dioxide are waste products
• Eventually the yeast population reaches a peak and then population declines
• As ethanol reaches about 12%, the yeast dies in their wastes
• Many examples of this in biology
• Environment has a carrying capacity
• The level of population a natural resource base can sustain without depletion, whether is be humans or animals
• Once the population passes the threshold of the carrying capacity, then population declines.
• Population is depleting the resources
• More people consume more goods and services
• Economics
• Demand function - relationship between a market price and quantity demanded by the consumers
• Law of Demand - a higher market price means consumers reduce their quantity demanded
• Supply function - relationship between a market price and quantity supplied by the producers
• Law of Supply - a higher market price means producers want to increase their quantity supplied
• A market brings these two behaviors together
• Market price and quantity are shown below:

• Market is stable
• If price is higher than market price of \$2
• Market has a surplus
• Producers are supplying more than what consumers want
• Producers lower the price until the price is \$2 again
• If price is lower than market price of \$2,
• Market has a shortage
• Consumers want more than what producers are supplying
• Producers raise the price until it is \$2
• Market has many assumptions
• Lectures 3 and 4 we will discuss market failures
• Why do some markets have a perpetually shortage or surplus?
• Government is intervening with the market price
• Why is demand and supply important?
• Higher population means more people, and thus, more consumers
• Demand shifts to the right
• Market price and quantity both increase
• Producers increase their quantity supplied

• Humans have market prices for their goods and services
• High market prices cause
1. Industries expand to the higher demand and price
• More suppliers enter the market
• Supply shifts right
• Market price falls
• The price drop depends on industry and its long-run cost
2. More products are supplied to market
• More resources are located and extracted
• More waste are generated
3. Spurs technological progress
• If many industries are expanding within a country, then we have economic growth

## Economic Growth

• Macroeconomics
• Gross Domestic Product (GDP) - the traditional measure of macroeconomic performance
• GDP is the sum of the money values of all final goods and services produced in a country during a year.
• Does not include sales of intermediate goods and services
• Only includes products and services produced within a country
• Does not include voluntary work
• Does not include degradation to the environment
• Does not include depletion of resources
• Depleting a stock of natural resources (e.g. oil, minerals, forests) increases GDP
• Used in production of goods and services
• Future generations could be hurt
• Less petroleum or no forests if they are cut down
• Economic growth -increases in GDP
• Usually GDP per-capita output
• Per capita is per person
• A higher GDP per capita means each citizen has more goods and services
• Thus, population is important.
• Picture below shows GDP percent-growth rate in 2007
• Before the 2008 Financial Crisis

• Derivation of a Growth Model
• Total production of goods and services in a country are treated as one large production function for whole economy
• Common in growth theory

GDPt = f(A, Kt , Lt , Rt , Et

• Variables are
• GDP at time t
• A is autonomous growth
• Reflects technology, usually the intercept in a regression equation
• K is capital
• L is labor
• E is for energy
• R is for natural resources
• Usually equation has E or R, but not both
• Petroleum or coal are resources that society derives energy from
• Is economic growth good or bad for the environment?
• More growth means GDP is increasing
• Requires more resources and energy
• Technology can change A too, creating an offset!
• If government imposes restrictions on natural resources or energy use, then regulations put restrictions on natural resources, R, or energy, E.
• Companies could adjust capital, K, or labor, L, but restrictions would most likely lower GDP growth
• Technological progress could increase A also
• It is difficult to measure impacts of regulations on resources, environment, and GDP
• Example
• Government imposes a regulations to reduce air pollution in a city
• Causes higher costs
• People may be healthier
• Live longer, work harder, pay less money for medical problems, etc
• Thus, regulations slow GDP down initially, but healthier people make GDP grow faster.

## The Environmental Kuznet's Curve

• Kuznet's curve is a hypothesized relationship between environmental degradation and income per capita.
• The shape of the relationship is an upside down U-shape.
• The shape is estimated as a quadratic, Et=f(GDP, GDP2), where E is pollution emissions at time t per capita and GDP per capita.
• When income per capita is low, a country does not invest in pollution abatement.
• As income per capita increases, a country invests in more pollution abatement.

• Examples:
• Society goes through transitions from agricultural to heavy industrial, which increase pollution.
• Over time, heavy industrial is replaced with services and light industrial, which generates less pollution.
• Environmental regulations can strengthen over time as country develops.
• Higher income allows more investment in pollution equipment.
• Country goes through deforestation and then afforestation.
• Criticism
• Some pollution levels increase at a decreasing rate.
• Carbon dioxide emissions
• Technology reduces a car engine's CO2 emissions
• Higher incomes means more people buy cars
• One possible reason for the problems of finding the Kuznet curve is the process of learning.
• As developed countries develop pollution abatement technologies, developing countries can implement these technologies at a faster rate, which give different estimates of the Kuznet curve.
• Latecomers had the advantage of learning from other nations' environmental policies.
• They learn what works and does not work
• This is a technological leader-follower model.

Japan's History of Environmental Policy

• Early concerns about damage from copper mining arose in 1868
• Government did not pay serious attention to the environment until after World War II.
• United States helped re-develop their country
• National economic development was the central government’s top priority.
• Pollution was viewed as a local government problem.
• Rapid growth in the 1950s led to increases in pollution.
• 1958
• Japan had disease outbreaks from water pollution
• The National Diet passed two water quality laws in 1958
• The first laws at the national level.
• Before hosting the Tokyo Olympics in 1964
• International pressure to improve water quality in the Sumida River in Tokyo.
• Japanese government created the Pollution Control Division of the Ministry of Health and Welfare (1964) and the Basic Law for Environmental Pollution Control (1967).
• Recently, Japan has focus policy focus shifted to global issues.
• Kyoto Protocol - reduce greenhouse gas emission to slow down global warming
• Japan is now focusing on “quality of life” issues.
• Not mentioned
• Since the early 1990s, the Japanese economy entered into two decades of sluggish growth
• Real estate prices are still dropping and economy has weak growth

China's History of Environmental Policy

• Mao Zedong declared in 1949 that pollution was a capitalist problem that did not exist in socialist countries.
• In 1972, water pollution began to attract the government’s attention
• Environmental Protection Law passed in 1979.
• The Constitution stated that protecting the environment was the responsibility of the state.
• Polluters should be held responsible for pollution treatment, including a polluter pays fee system.
• Government has lack of resources
• Local governments focus on growth
• More factories, more jobs, more income, and more taxes
• Local governments opened illegal coal mines and built electric power plants without the national government's approval
• The Olympics were held in China in 2008
• China was embarrassed about the green water off of Shanghai
• Some Olympiads wore gas mask in Beijing because of the high air pollution levels
• Maybe the Chinese government will add more environmental laws

## The Developing World

• The developing world
• Have higher population growth rates
• Moving from agrarian societies to industrialized societies, which results in more pollution.
• Increasing urbanization
• People are moving to the cites, because that is where the jobs are
• Same thing in the United States and Kazakhstan
• Potential Problems
1. Urbanization - environmental problems become problems when people are close together, so that their actions affect others nearby.
• The infrastructure to support increased populations is lacking in many cities.
• Fresh water, collecting and treating waste water, solid waste disposal, etc.
2. Weak governance
• Not only are regulations often weaker, but the government may not enforcement compliance.
3. Corruption and lack of democracy are also problems.
4. Lack of information/education
• Educated people (in the United States) are pro-environment
• Encourage environmental regulations
5. Developing countries have wide spread poverty
• Place less weight on future considerations like environmental damage or resource depletion
• Developing countries may use less efficient technologies
• They could buy the old equipment and machines used in developed countries
• Less efficient machines use more energy and resources
• Benefits
• If they become high-income societies, then they may invest in green technologies or replenish renewable resources
• Population growth rate slows down
• However, high-income societies use more resources and produce more pollution such as carbon dioxide.
• Leakages - not in many introductory courses
• United States - environmental laws became too harsh
• Compliance costs were too high
• Some industries relocated to countries like Mexico and China
• Weak environmental laws
• Cheaper labor
• These industries pollute even more shipping their products to the United States
• High U.S. incomes are indirectly creating large amounts of pollution
• I think this happened to Japan too
• Japan started to outsource the production of goods and services to other Asian countries.
• Japan was big investors in other countries like China, South Korea, etc.
• Some countries activity seek out companies, trying to get them to invest in their economies
• Creates jobs, incomes, economic growth, and more tax revenue

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